TIME: Almanac 1993/TIME Almanac 1993.iso/time/013089/01308900.020

Text File | 1992-09-23 | 5.8 KB | 111 lines

                                                                                BUSINESS, Page 52

Crackdown on the Chicago Boys


An undercover FBI sting rounds up evidence of widespread fraud
in the city's freewheeling commodities markets


    In the controlled chaos of Chicago's commodities pits, there
is no time to reflect, only time to react, to buy when the
market heads north, to sell the instant it flounders. Thus the
busy traders never really stopped to wonder about the unusual
behavior of several new colleagues who regularly lost thousands
of dollars but kept coming back for more, day after day for two
years. Tom Hicks, a trader on the Chicago Mercantile Exchange,
remembers one in particular named Peter Vogel: "He was real
clean-cut -- wing tips, clipped hair, tie always knotted
tightly. He didn't dress like the rest of us. They called him
`the accountant.'"

    The traders were right on one count: the man named Vogel was
keeping tabs on everyone. Last week it was disclosed that
several FBI undercover agents carrying hidden tape recorders
had penetrated the pits as part of the largest criminal
investigation ever to hit the Chicago commodities markets. The
sting operation, designed to catch unscrupulous commodities
traders who were defrauding customers of millions of dollars,
broke into the open when the Justice Department reportedly
began issuing subpoenas to at least 40 people connected with
the Chicago markets. By the time they finish gathering evidence
in the next few weeks, federal prosecutors may be able to
indict 100 or more commodities brokers and traders on felony
charges of fraud and racketeering.

    Word of the sting prompted widespread soul-searching on the
normally ebullient trading floors of the Merc and the Chicago
Board of Trade. "There's paranoia in the pits today," said a
futures trader. "Nobody knows just how much the feds have got
and against whom." Several panicky traders who reportedly had
been subpoenaed sold their exchange seats, including one on the
Merc that went for only $330,500, a sharp drop from the
previous sale at $380,000 only a week earlier. Many traders
worried about what the scandal might cost Chicago's booming
markets in terms of lost prestige and new Government regulation.
Says a broker: "It shows once and for all that we're not capable
of regulating ourselves honestly."

    On Wall Street some traders noted with satisfaction that the
rival Chicago markets, which many New York investors blamed for
aggravating the stock-market crash of '87, were getting a dose
of the scrutiny that the stock markets have long endured. Said
the president of a Big Board firm: "There is some quiet delight
that the Chicago boys are finally getting their comeuppance."

    Originally set up more than 70 years ago to help farmers
hedge their bets on the future of their crops, the Merc and the
Board of Trade grew explosively during the 1980s by offering
futures contracts on everything from foreign currencies to
precious metals. But for all their sophisticated new financial
products, the exchanges still use the old-fashioned,
face-to-face auction system of making trades. The leader of the
investigation, Anton Valukas, the U.S. Attorney for the
Northern District of Illinois, apparently decided that the
system left plenty of room for rip-offs of commodities buyers.

    Federal law requires that traders and brokers must try to
get the best possible price for their customers when executing
trades. But because the deals are conducted orally, illegal
trades are difficult to catch. When four FBI agents masqueraded
as commodities dealers, however, they were able to secretly
tape-record the transactions taking place at the Board of Trade
and the Mercantile Exchange.

    One typical shady deal they are believed to have detected is
the "bucket trade," in which a broker slices an extra profit
margin by buying a contract from a confederate at a bit more
than the going price in the pit, or selling one for a bit less.
For example, if a customer asks the broker to sell a soybean
contract of 5,000 bushels and the market price is $7.50 per
bushel, the crooked broker may sell the contract to a colleague
for $7.40. That gives the colleague a discount of 10 cents per
bushel, or $500, some of which he kicks back to his partner.
The customer probably cannot challenge the price because there
is no record of precisely when the deal occurred.

    The undercover agents recorded their information not just in
the hurlyburly of the pits but on social occasions as well. Two
feds working the Board of Trade solicited stories about illegal
trades by throwing lavish parties in their high-rise apartments
and by joining the posh East Bank Club, a gym popular with
commodities brokers. One agent who called himself Richard
Carlson claimed that he specialized in soybean contracts and
was a native New Yorker; the other, who called himself Michael
McLoughlin, said he worked the Treasury-bond pit and was from
Florida. "Both were nice guys, pleasant, friendly," recalls a
trader. "Now that I think of it, they asked an awful lot of
questions, but I thought it was just eagerness to learn."

    The biggest fear among law-abiding Chicago traders and
brokers is that evidence of shady dealings will inspire
Washington to clamp down on the freewheeling markets. Already
Texas Democrat Kika de la Garza, chairman of the House
Agriculture Committee, plans to investigate the Chicago
exchanges. Congress could decide to beef up the relatively tiny
agency that oversees the Chicago markets, the Commodity Futures
Trading Commission, or transfer the authority to the Securities
and Exchange Commission. "Figuratively speaking, at least,"
laments a futures broker, "there'll be police in the pits from
now on."